Use your ISA allowance
Industry research has found that investors waste £133 million in tax benefits each year by not putting money in ISAs.
A cash ISA should always be the first place for your savings - especially at the moment, when rising inflation poses a serious threat to everyone. So act quickly to shelter your savings from HM Revenue and Customs.
In 2008/09 anyone over the age of 18 can invest up to £7,2000 in an ISA, of which up to £3,600 can be kept in a cash ISA. Unlike traditional saving or investment accounts, in an ISA your money will grow free of further income or capital gains tax.
At the moment, high inflation means taxpayers risk seeing their savings being eroded in value - unless they are getting a certain interest rate. For higher-rate taxpayers, this is no mean feat, but putting your savings into an ISA will keep the taxman away from your door and will generally give you a better return.
The same goes for basic-rate taxpayers; while there are plenty of competitive savings accounts on the market at the moment, in most cases a cash ISA should still be the first home for your nest-egg.
Where to invest
If you don't already have an ISA it's generally advised to start with a cash ISA, so if you have money in other (non-ISA) savings accounts transfer it as soon as possible.
When shopping for a cash ISA, there are several factors to consider - so don't just be drawn in by the headline interest rates on offer. Firstly, you'll need to decide whether you want to opt for a fixed-rate ISA or a variable-rate account.
A fixed-rate ISA offers security for a set period of time - normally between 12 months and three-years - but be aware that you will not be able to access your money during that time.
If instant access is a key priority for you, then you might be better off with a variable rate ISA. The downside, is that you could see your interest rate go down over time.
Another point to consider is whether the ISA accepts transfers or not. If you want to protect your savings from the taxman and the inflation-monster then moving your ISA savings from previous tax years into one place is probably a good idea. However, many of the best headline rates on the market don't allow transfers.
You can use Moneywise's compare and buy service to find the most competitive ISAs, or read our daily round-up of the ISA market to find out what deals are out there, which allow transfers and whether there are any catches.
Once your utilised your £3,600 cash ISA allowance for 2008/09, then you could consider taking a little more risk for greater growth potential, and investing at least some of your full ISA allowance in an equity fund.
Making the most of your allowance
Your tax-free allowance of £7,200 in 2008/09 doesn't have to be deposited in a lump sum at the end of the tax year - instead, you can begin making smaller regular monthly contributions throughout the year to utilise your allowance and maximise growth.
Normally, ISA interest rates are at their highest at the very start and very end of the tax year, but at the moment the credit crunch means rates are still looking good.
So, there really is no reason to delay - especially if you already have savings in a standard account.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.